On today's TSX Breakouts report, there are 55 stocks on the positive breakouts list (stocks with positive price momentum), and 15 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a subscriber's request to profile a stock that recently appeared on the negative breakouts list.
The stock has been in a downtrend since early 2016. I tend not to profile stocks from the negative breakouts list as these stocks typically decline in value for a fundamental reason. While these stocks may see their share prices stabilize, in order to see a recovery, buyers have to come into the market. This won't happen unless sentiment changes, typically resulting from improving company fundamentals or industry conditions – which takes time. Year-to-date, the share price is down 8 per cent. However, over the past week, the share price has rallied 8 per cent, bouncing off its 2017 low of $21.21, set last week on September 14. The security discussed today is Cara Operations Ltd. (CARA-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Vaughan, Ont.-based Cara is a restaurant operator with a portfolio of 16 well-known restaurant brands: Swiss Chalet, Harvey's, St-Hubert, Milestones, Montana's, Kelsey's, East Side Mario's, New York Fries, Prime Pubs, Original Joe's, State & Main, Elephant & Castle, Burger's Priest, Bier Markt, Burger's Priest, and Landing. As at June 25, the company had 1,255 restaurants, of which 164 were corporately owned restaurants, 50 were joint venture restaurants, and the majority, 1,041 restaurants, representing 83 per cent of its restaurants, were operated by franchisees.
After the market closed on July 31, the company reported disappointing second quarter financial results. Operating EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $41.6-million, well below the consensus estimate of $48-million. Same restaurant sales (SRS) declined 0.3 per cent, negative for the fifth consecutive quarter. On August, 1, the share price dropped 1.9 per cent on high volume with over 327,000 shares traded, well above the three-month historical daily average trading volume of approximately 86,500 shares. On August 2, the slide continued with the stock price falling 2 per cent and over 617,000 shares traded.
The lack of growth is a major concern. On the earnings call, the president and chief executive officer Bill Gregson summed it up by saying, "As for performance, SRS growth, obviously, is the key to improving our profitability." Looking forward, if the company can return to positive SRS, and sustain positive SRS, this may act as a catalyst for the stock.
In addition to negative SRS, a future headwind, or challenge for the company is rising minimum wages. In Ontario, minimum wage will jump from $11.40 per hour to $15 per hour in 2019. The province of Alberta will also be adopting a $15 minimum wage, but earlier, by October 1, 2018. The company has 55 per cent of its restaurants located in Ontario and 13 per cent of its locations are in Alberta, and the company has a high percentage of corporately owned stores, 13 per cent as at June 25.
Another concern for future SRS improvement is the reduction in targeted renovations. The company renovated 29 restaurants in the first half of the year with 43 renovations scheduled for the second half of the year. This is down from its previous expectations. On the first quarter earnings conference call, the CEO targeted "north of a hundred" restaurants would be renovated this year. This reduction has implications for SRS as renovated restaurants generally improves traffic. People like to go out to newly renovated restaurants and enjoy their dining experiences.
On a positive note, management has the financial capacity to fund future acquisitions. The company's debt-to-EBITDA ratio is approximately 2 times.
Returning capital to its shareholders.
The company pays its shareholders a quarterly dividend of 10.169 cents per share, or 40.676 cents per share yearly. This translates to an annualized dividend yield of 1.8 per cent.
After the second quarter (post June 25), the company repurchased 133,796 shares as part of its share buyback program.
Analysts' recommendations
There are eight firms that provide research coverage on this small-cap stock with a market capitalization of $1.37-billion. Analysts' recommendations are mixed, four analysts have buy recommendations and four have hold recommendations.
The eight firms providing research coverage are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Capital Markets, and Scotia Capital.
Unfortunately, not one analyst downgraded the stock to a sell recommendation despite the slide in the share price. The stock price declined 23 per cent in 2016 and has fallen 8 per cent so far this year. The stock is now trading right around its 2015 initial public offering price of $23. The four analysts with current buy recommendations maintained their recommendations while the stock price drifted down.
Of note, two analysts reduced their expectations in what turned out to be a good call. The analyst at Raymond James, Kenric Tyghe, downgraded the stock to a "market perform" from an "outperform" in May 2016 and has maintained this recommendation (with a current target price of $25 – a low on the Street). A few months later, in November 2016, Peter Sklar from BMO Capital Markets followed suit, downgrading the stock to a "market perform" from an "outperform." His current target price is also $25 – the same low on the Street.
Financial forecasts
The Street is forecasting EBITDA to come in at $186-million in 2017 and increase 5 per cent to $196-million in 2018. The consensus earnings per share estimates are $1.74 in 2017 and $1.71 in 2018.
Earnings estimates have moderated in recent months. For instance, three months ago, the consensus EBITDA estimates were $194-million for 2017 and $205-million for 2018.
Valuation
The stock is commonly valued on using an enterprise value-to-EBITDA approach. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 9.1 times the consensus 2018 estimate. Looking back to the beginning of 2016, the stock peaked at multiple of 11 times and troughed at around 8.5 times, and is currently trading at the lower end of this range.
The one-year consensus target price is $27.69, suggesting there is over 20 per cent upside in the share price over the next 12 months. Target prices range, from a low of $25 (implying 9 per cent upside potential) to a high of $32 (suggesting there is upside potential of nearly 40 per cent). Individual target prices are as follows in numerical order: two at $25, $26.50, two at $27, $29, $30 and $32.
Revised recommendations
In August, six analysts reduced their target prices after the company reported its second quarter earnings.
Kenric Tyghe from Raymond James reduced his target price by $3 to $25. Similarly, Peter Sklar from BMO Capital Markets moved his target price down to $25 from $28. George Doumet, the analyst from Scotia Capital, trimmed his target price to $32 (the high on the Street) from $34. Leon Aghazarian from National Bank Financial reduced his target price by $4 to $30. Elizabeth Johnston from Laurentian Bank cut her target price by $5 to $27. Sabahat Khan from RBC cut his target price to $29 from $31.
Insider transactions
Year-to-date, there has only been one transaction in the public market reported by an insider.
On August 3, the company's chief executive officer Bill Gregson purchased 8,715 shares at an average price per share of $23.56, increasing his sizable portfolio position to 1,083,984 shares.
Chart watch
There is limited trading history on this stock since it just began trading on the Toronto Stock Exchange in April 2015, limiting technical analysis on the stock.
That being said, the share price has been in a downtrend, marked by lower highs and lower lows, during most of its trading history.
Year-to-date, the share price is down 8 per cent. However, over the past week, the share price has rallied 8 per cent, bouncing off its 2017 low of $21.21, its closing price from September 14. Yet, trading volume has been in-line with its historical levels, not high, which is what you want to see with a recovery. Consequently, the current rally may soon stall.
In terms of key resistance and support levels, there is initial overhead resistance around $23, near its 50-day moving average (at $22.96). After that, there is a ceiling of resistance between $24 and $25, near its 200-day moving average (at $24.78). Looking at the downside, there is support around $21, and then at $20.
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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